The forecasting trap

Alternative lenders such as Just Cash Flow PLC are in a privileged and responsible position as we get to see the plans of businesses keen to invest and grow.

Many are well thought out, based on thorough planning, forecasting and assumptions. These businesses can really benefit from the range of tailored credit solutions we offer.

However, we also have a responsibility to point out where plans fall short and provide valuable guidance on what should be factored in or thought through again. One of the biggest traps relatively new businesses fall into is forecasting.

“Return to sender, address unknown” – the lyric from Elvis’ well known song could easily be the instruction for what some businesses should do with their forecasts.

Continuing with the Elvis theme, did you know that there is an all-time high of around 85,000 Elvis impersonators in the world? This compares with just 170 in 1957 when he died. At this rate of growth experts predict that by 2019, Elvis impersonators will make up one third of the world’s population.

Anyone want to join me in setting up a quiff wig and false sideburns company?
Of course this is a ludicrous extrapolation of a trend that makes statistical but not common sense. However, you would be surprised how many businesses make forecasts using statistical trends and are wedded to them for far too long.

When I started out in business I made exactly this mistake and quickly learnt that initial business projections about size of market, rate of growth and potential share are inevitably wrong and should be revised at the first opportunity and then at regular intervals.

Another trap is the commendable, but ill-founded optimism. You will have heard this, the total annual worldwide market for our product/service is £2 billion, we just have to capture 1 per cent and that is £2 million. The rest of the plan is largely built around the estimated cost of production and healthy margin that can be made. Often these costs are taken from a rival supplier with the optimistic assumption you will be able to undercut them by 10 per cent.

I believe lenders have the responsibility to support applicants that can show they really understand their business plans and can back up the assumptions they are based on.

However, I also believe there is a responsibility to point out where plans fall short and to give guidance on how they should be revised and represented in the future.